The World in U.S. Courts: Summer and Fall 2016 - Securities Law/Commodities Exchange Act (CEA) | June.29.2016
KPMG, one of the “Big Four” accounting firms in Canada, is a Canadian partnership. It served as independent auditor for Poseidon, a Canadian corporation engaged in the development and commercialization of fluid storage and solutions for the oil and gas industry. Poseidon conducted operations in the US through a subsidiary based in Denver, Colorado. The majority of Poseidon’s revenue stemmed from US transactions. In 2013, Poseidon filed for bankruptcy, after a significant earnings restatement caused its stock to drop precipitously. More than half of Poseidon’s creditors were based in the U.S.
After Poseidon’s demise, shareholders brought a class action against Poseidon and KPMG, alleging that Poseidon recognized much of its revenue fraudulently. The claims against KPMG arose from two statements it made in its 2011 audit report: (1) in KPMG’s opinion, the financial statements fairly presented Poseidon’s financial position in accordance with International Financial Reporting Standards; and (2) KPMG conducted its audit in accordance with Canadian Generally Accepted Audit Standards. KPMG moved to dismiss the claims against it on multiple counts, including lack of personal jurisdiction and failure to state a claim.
In analyzing the personal jurisdiction issue, the Court looked at whether KPMG’s contacts with the US as whole were such that it had “purposefully avail[ed] itself of the privilege of conducting activities within the United States, thus invoking the benefits and protections of its laws.” The Court found that because KPMG had agreed to audit a company “with such significant business assets, operations, and income sources located in the US,” requiring it to have “repeated and substantive engagement with Poseidon’s US offices and operations,” including corresponding with Poseidon employees in the US, KPMG had necessarily availed itself of the privileges of doing business in the US. The Court also found that fairness considerations did not weigh in favor of rendering jurisdiction unreasonable, noting that KPMG, as one of the “Big Four accounting conglomerates,” could “easily” adjudicate this claim in the US.
[Editor’s note: While the Court refused to dismiss the claims against KPMG on personal jurisdiction grounds, it did dismiss them for failure to plead a claim, finding that the complaint failed to allege with particularity facts giving rise to an inference that KPMG had acted with the requisite scienter.]